Office of the Superintendent of Financial Institutions
The following table of questions and answers is intended to provide supplementary guidance to insurance companies that are affected by the implementation of OSFI's Guidance for Reinsurance Security Agreements ("the RSA Guidance"). Many of the questions contained herein were derived from enquiries OSFI has received through its interaction with industry stakeholders during the process to clarify certain aspects of the regime. This document will be updated on a periodic basis.
In the past, OSFI developed a standard form Reinsurance Trust Agreement (RTA) that federally regulated companies (ceding companies) were required to use in order to be eligible for a capital/asset credit in respect of unregistered reinsurance.
While OSFI was of the view that its standard form RTA generally provided adequate protection to ceding companies, the decision to adopt a new approach came as a result of discussion within the legal community as to whether the enforceability of RTAs could be challenged and whether other arrangements would be beneficial to ceding companies, while providing a similar or greater level of protection.
OSFI's decision to move away from standard form agreements was supported by a number of factors. These factors include:
Yes. Prior OSFI approval is required to release assets from an RTA. Please refer to the termination provisions contained in the standard reinsurance trust agreement. Companies must apply to OSFI's Securities Administration and Approvals Reporting Unit (SAAR). For instructions on completing and filing the application for approval, see Procedures for Completing OSFI 298 Form. The "Reason for Release" should indicate "transfer of assets from RTA to RSA". It is expected that all assets will flow to an account pursuant to the RSA. If any assets are to be released to the reinsurer at this time, a separate Form 298 should be provided.
Before approval of transfer is granted, the ceding company must have filed a scanned copy of the executed RSA and corollary agreements with OSFI's Securities Administration Unit (the collateral agent may do so if the company has delegated this authority). The SAAR will provide an identification number (S+4 digits) to the Collateral Agent for reporting purposes.
Yes. RSAs are but one form of collateral enabling a capital credit for unregistered reinsurance and LOCs are deemed to be acceptable as well. However, LOCs are subject to specific limits and conditions. For guidance, ceding companies should refer to the Minimum Capital Test (MCT) Guideline or to the Minimum Continuing Capital and Surplus Requirements (MCCSR) for Life Insurance Companies Guideline, as applicable, and to the General Guidelines for the Use of Letters of Credit. Companies may also wish to refer to OSFI Guideline B-3 Sound Reinsurance Practices and Procedures.
No. LOCs are instruments with distinct attributes and mechanisms for drawing-down of funds. These are held by the ceding company (if a Canadian insurance company) or by the ceding company's trustee (if a foreign insurance branch) and, as such, would not be included as part of an RSA, which relates to a reinsurer's pledged assets.
Ceding companies should refer to the MCT Guideline or to the MCCSR for Life Insurance Companies Guideline, as applicable, for guidance on how to calculate the capital/margin requirement for unregistered reinsurance. In some cases, the margin requirement for each unregistered reinsurer may be reduced to a minimum of 0: Where the credit for unregistered reinsurance available for an unregistered reinsurer exceeds the credit that has been applied towards the requirements for reserves ceded to the reinsurer, the amount of the excess, divided by 1.5 (or another factor if specifically required by the Superintendent), may be used to reduce certain components of required capital for the reinsured policies.
For example, in recognition of OSFI's minimum 150% supervisory capital target for P&C companies, any portion of collateral remaining to cover the margin of 10% is divided by 1.5. In other words, in order to offset a 10% margin completely, the ceding company would need to hold 115% of collateral to avoid holding capital on the unlicensed reinsurance.
Yes. Counterparty credit risk capital requirements are applied to the collateral.
OSFI has not prescribed a list of permitted assets. Ceding companies are expected to define in their policies the types of prudentially acceptable pledged assets and limits as well as practices and procedures in place for managing and controlling risks related to any pledged assets. Of note, ceding companies should consult the MCT or MCCSR Guidelines for information on capital charges for investments related to unregistered reinsurance.
In addition, in respect of a particular RSA, the ceding company is required to obtain a legal opinion asserting that a valid and enforceable security interest, that has priority over any other security interest in the pledged assets, has been or will be created in its favour for the type of assets covered by the legal opinion.
It is OSFI's understanding that there may currently be legal issues regarding priority and perfection of certain types of assets, such as cash, under some provincial laws. Given the number of jurisdictions involved and the ongoing potential for jurisprudential or statutory developments, OSFI has taken the view that the ceding company should obtain a legal opinion to confirm that it has a valid and enforceable first ranking security interest in the particular type of assets.
In all cases, assets must be held in Canada (either by Collateral Agent or by CDS Clearing and Depository Services) and otherwise comply with requirements as set forth in the RSA Guidance.
OSFI has no objections to companies either entering into two separate agreements or a single combined RSA/control agreement, as long as all RSA Guidance requirements are satisfied. A copy of all relevant agreements forming the RSA should be filed with OSFI (we do not require the reinsurance treaties but it is expected that any relevant legal documents (see below) will be kept on file with the legal opinion by the ceding company to be produced upon request).
Ceding companies should be mindful when negotiating such agreements that factors such as relying on a standard-form template could in practice have an impact on the terms that are ultimately agreed upon.
Under RSA Guidance, it is generally the ceding company's responsibility to ensure that pledged assets at all times comply with the requirements. In addition, it is the ceding company's responsibility to monitor the assets held pursuant to an RSA to ensure they comply with the parties' own schedule of authorized asset classes. In other words, it is the responsibility of the reinsurer to provide adequate and appropriate security and that of the ceding company to monitor the collateral appropriately.
OSFI understands that in certain cases, collateral agents may not automatically monitor the assets held pursuant to the RSA to assist in ensuring compliance with RSA Guidance and/or the ceding companies' policies. It is the parties' prerogative to make contractual arrangements to facilitate this process for the ceding company. For example, the ceding company may choose to insist upon a clause to ensure that the reinsurer will only remit to the collateral agent permitted assets that are part of a particular schedule of assets, and/or that non-permitted assets may only be pledged together with a note from the ceding company indicating consent.
The collateral agent is required to file a monthly report to OSFI on assets held pursuant to the RSA (see RSA Guidance). OSFI Supervision may request the ceding company to have an asset replaced should they determine an existing asset is not appropriate or in keeping with the cedant's investment policy.
Pursuant to RSA Guidance, OSFI expects that ceding companies entering into an RSA will obtain a legal opinion, on which OSFI and the ceding company will be entitled to rely, asserting that they have obtained and maintain a valid and enforceable security interest in the reinsurer's pledged assets that have priority over any other security interest in these assets.
Where the ceding company intends to obtain the legal opinion, or portion thereof, from the reinsurer's counsel or another third party, the company should satisfy itself by consulting its own counsel as appropriate that it is an opinion on which both OSFI and the company will be entitled to rely, having regard to the relevant jurisdiction's laws and/or ethical rules.
In all cases, the opinion must be provided by a lawyer who either has expertise in the area of personal property security legislation in the Canadian province where the assets are held or who is reasonably relying on the legal opinions of those who have such expertise. In addition, Canadian counsel may elect to request a legal opinion from a lawyer who has expertise in this area in the jurisdiction of the unregistered reinsurer to ensure the security interest is recognized in the foreign jurisdiction. Finally, where a legal opinion is provided by in-house counsel, OSFI expects that the opinion will state that it is provided by counsel in his or her professional capacity as a lawyer and not in any other capacity.
In relation to a particular RSA, where the ceding company approves a new type of asset not already covered by the accompanying legal opinion, OSFI expects that the company will obtain an additional legal opinion asserting that a valid and enforceable security interest has been or will be created in its favour in respect of this new type of asset.
RSA Guidance requires that an accompanying legal opinion be obtained in respect of any RSA entered into by the ceding company and that a copy of all legal documents and/or agreements to which the opinion applies be duly included as an attachment to the opinion. These are to be kept on file by the ceding company to be produced upon request.
OSFI expects that in all instances, this would necessarily include the RSA. In addition, lawyers are expected to include any other legal documents, as applicable, to which the opinion relates or which are otherwise relevant for understanding and/or interpreting the opinion.
Certain industry associations and organizations, such as the Reinsurance Research Council (RRC), and Property and Casualty Insurance Compensation Corporation (PACICC) issue various technical reference tools, providing wordings for reinsurance contracts and/or insolvency clauses for the Canadian industry.
While there are several such sources, it must be noted and stressed that OSFI does not provide or endorse particular language or wordings for reinsurance contracts. Companies are encouraged to consult with their legal counsel. In any event, the wordings used in any reinsurance arrangements are expected to be consistent with Guideline B-3 Sound Reinsurance Practices and Procedures. Companies may also wish to refer to OSFI's RSA Guidance and other background on OSFI's Reinsurance Policy Review.